Cable merger is bigger than cable [Commentary]

The cable company is one entity everyone likes to hate. Perhaps this knee-jerk animosity is to blame for the rush to condemn Comcast's proposed $44 billion merger with Time Warner Cable. Critics complain that combining the nation's two largest cable companies would create a "behemoth" with 30 million customers, nearly one-third the cable/satellite market.

But calling this a "cable deal" misunderstands the dynamic nature of the modern video marketplace. America is in the midst of an entertainment revolution, giving consumers more choices than ever. The Comcast-TWC merger is a reaction to this revolution, and evaluating its effects requires a more nuanced analysis.

In many ways, Comcast is reminiscent of another company everyone liked to hate: Blockbuster. In 2005, Blockbuster tried to acquire Hollywood Video, which would have merged the nation's two largest video rental store chains. But the government opposed the $1 billion transaction because the combined company would control over half of the video store rental market. As a result the deal collapsed. Within five years, both companies had declared bankruptcy and today both are defunct.

Everyone hates them because they over charge at ridiculous levels. And they jam up roku/amazon/netflix to make the viewer uneasy. They're cowards who won't work in upright capitalistic ways, but would rather sit on their fat rumps trying to figure out ways to undo the competition,...

In retrospect, regulators defined the relevant market far too narrowly. Blockbuster's primary competition was not other video stores, but newer entertainment options such as pay-per-view, Redbox kiosks and Netflix's disc-by-mail service. To survive against these upstarts, Blockbuster needed to become more efficient. The Hollywood Video acquisition would have allowed Blockbuster greater economies of scale, giving it at least a fighting chance. But in an effort to promote video store competition, the government ironically hastened that sector's collapse.

While Comcast is far healthier than Blockbuster, the parallels are striking. Like video stores a decade ago, cable television is in decline. Over 1 million Comcast and Time Warner subscribers "cut the cable cord" in 2013, while many younger millennial consumers are foregoing cable completely. Rising prices are the culprit — but cable companies have less control over prices than you might think. Bloomberg reports that over half of your cable bill ultimately goes to content providers such as Viacom and Disney. While cable bills have risen 5 percent each year, these programming costs have risen 10 percent each year, creating an increasingly difficult margin squeeze for cable providers.

Meanwhile, consumers have more video options than ever before. Technology has eroded the lines between hardware, content and media companies. Today, Comcast's biggest competitive threat is not other cable and satellite providers but new entertainment sources not even imaginable a decade ago. Netflix streams video online and is responsible for one-third of all Internet traffic during peak times. Apple is transforming itself from a device manufacturer into an entertainment company that delivers music, video and games instantly through a seamless customer interface. Google has expanded beyond Internet search to video services and even broadband data networks. Verizon, a traditional telephone company, recently bought the rights to stream NFL games to smartphones. Even Walmart has entered the streaming video business.

Although post-merger Comcast would be large by cable company standards, it pales compared to some of these technology giants. Verizon serves almost 100 million wireless subscribers. AT&T is not far behind, and together they have over 25 million broadband customers. Apple has an installed base of 350 million iOS units. Google's YouTube service processes 100 hours of new content from users each minute. Even Netflix serves more customers than Comcast: 33 million Americans and growing, plus another 11 million internationally.

Comcast stands out as a regional player in a national marketplace. It is unsurprising that the company feels it must grow to meet these nationwide competitors for your entertainment dollar. Greater scale would allow Comcast greater leverage to stem rising programming costs. This would free up capital to improve Internet speeds, build out broadband networks and compete more effectively in other markets.

Of course, the merger is not without risk. The deal will have complex effects on many other markets, including broadband access, business services, wireless backhaul and Internet equipment. It is a challenging transaction, one that antitrust regulators should review carefully. But they should avoid rushing to judgment merely because Comcast is consolidating its position over a stagnant cable sector. Some consolidation may be necessary for cable to avoid Blockbuster's fate and instead compete effectively in this rich, dynamic and increasingly competitive video landscape.

Daniel Lyons is an associate professor at Boston College Law School, where he specializes in telecommunications and Internet regulation, as well as administrative law. His email is daniel.lyons.2@bc.edu.

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